Excise duty hike on cigarettes to ensure tax burden proportionate to health impact

New Delhi: A hike in excise duty on cigarettes from February 1 will ensure that such sin goods carry a tax burden proportionate to their severe public health impact, and also align with global best practices in tobacco taxation, sources said.

The Finance Ministry has notified the excise duty of Rs 2,050 - Rs 8,500 per 1,000 sticks, depending on the length of the cigarette, from February 1. The duty will be over and above the maximum 40 per cent Goods and Services Tax (GST) rate.

Currently, cigarettes attract 28 per cent GST, plus a compensation cess at a varied rate. Taxes on cigarette have remained at the same level in the past 7 years since the introduction of GST in July 2017.

This is in contrast to global best practices and public health guidance, which emphasises annual increases in duties to ensure that cigarette prices rise faster than incomes.

Globally, more than 80 countries revise tobacco taxes annually, many using inflation-indexing or multi-year excise schedules. Prior to the GST roll-out, even in India, excise rates on cigarettes were increased annually.

Sources said in the global context, India's seven-year pause in revising basic excise duty and cess rates stands out as an outlier. Without periodic adjustments, the public-health impact of tobacco taxation diminishes sharply, they added.

The revision in excise duty on cigarettes will ensure that cigarettes continue to carry a tax burden proportionate to their severe public-health impact, while simultaneously preserving fiscal stability and aligning with empirical global best practices in tobacco taxation, sources said.

Sources said that the current tax burden on cigarettes in India is neither excessive nor misaligned with global public-health standards.

According to World Bank estimates, India's total tax incidence on cigarettes is approximately 53 per cent of the retail price, which is substantially lower than the World Health Organization's recommended benchmark of 75 per cent or more for achieving meaningful reductions in tobacco consumption.

In fact, many countries with strong tobacco-control regimes impose significantly higher tax burdens. For example, the United Kingdom and Australia tax cigarettes at well over 80-85 per cent of the retail price, while France, New Zealand, and several EU member states maintain tax incidence levels exceeding 75-80 per cent.

Even middle-income countries, such as Turkey, South Africa, the Philippines, and Chile, have, over the past decade, raised cigarette taxation to levels approaching or exceeding the WHO benchmark.

Sources said that in comparison, India's current rate remains modest, leaving considerable fiscal and public-health space for calibrated increases without departing from global norms.

Maintaining a tax incidence closer to international best practices would ensure that the economic and social costs of tobacco-related morbidity are not unfairly shifted to poorer households or the exchequer, they added.

The need for excise duty on cigarettes arose as the GST compensation cess levy on such goods will come to an end on January 31. Revising the excise duty will help maintain the revenue buoyancy, especially given the rising healthcare costs associated with tobacco consumption.

The higher duty will prevent cigarettes from becoming more affordable at a time when the economic burden of tobacco-related diseases is estimated to exceed Rs 2.4 lakh crore annually, sources said.